Episode Transcript
Speaker 1 00:00:04 Uh, I worry, I worry about climate change and I worry that there is a lot of movement in the right direction. There's a lot of commitment and a lot of, uh, understanding growing. But if you look at the time skills that we're working on now, what the science says, so the, the, the consensus science, the what I take as, as, as my guidelines. I don't have, uh, my own unique insights on top of that. Then time's running out.
Speaker 2 00:00:28 Hi listeners. This is Kea Shrine. We'll be back in the new year with new episodes of the Definitive Sustainability Perspectives podcast. But today we have a special bonus episode for you featuring a conversation with Putsy Russell, c e o Ana Stall. Putsy Russell is a global index provider and research house and a sister company to Refinitiv under the ls, a umbrella by latest estimates around 18 trillion of capital are benchmarked against their indices. Ana caught up with guest interviewer Jamie McDonald in California about what it will take for sustainable investing to matter at scale, why transparency is key, and his concerns about greenwashing.
Speaker 3 00:01:18 Anna, thank you so much for taking the time to, uh, chat with us this afternoon. Of
Speaker 1 00:01:22 Course. And, and, and thanks for spending the time with me.
Speaker 3 00:01:24 The main issue I want to, to chat with you about is really around how the world of finance can affect the world of, uh, the environment and climate change. Mm-hmm. Um, and with the rise of passive investing, our indices is now paying the most important role when it comes to affecting ESG and, and issues in and around climate change.
Speaker 1 00:01:45 Uh, there is so much that needs to happen through finance to support sustainability, uh, and climate, uh, goals in particular. Uh, so financial markets have a huge role to play there because this is all about relocating capital to supporting a transition to a much lower carbon economy globally, not just for individual countries. And that requires capital flows to go to different projects, to different companies by funding new types of projects, climate technology, for example. So some of the solutions that we don't even know about yet, they need to get funded, but also to help existing companies transition. So to, to lower their footprint, to modernize their processes, to re-engineer their business models entirely. And finance is a huge role to play there, both from the capital market side, so raising capital for new projects and raising capital for companies, but also from a, a secondary market from an investment perspective, both from an active and passive stock market perspective, bond market perspective, there are huge opportunities to help capital flows drive the, the sustainability objectives really, and passive investing in particular, it's often thought that you need active engagement with companies from a shareholder perspective.
Speaker 1 00:03:03 Mm-hmm. <affirmative> to, uh, drive change. Uh, we actually believe that, uh, that industries both because they underlie very large capital flows, uh, especially in equity markets, but increasingly in fixed income markets as well. Fu Russell has by our LA latest estimates probably around 18 trillion or so benchmarked against it. So huge capital tracking these indices. So indices have a key role to play because of that, just because mm-hmm. <affirmative> capital flows are so tied to them, but also because they have a, a function to play as a, as a clearing house for engagement. So if you imagine there's lots of individual active investors that all want to engage with the corporate, but they might be saying slightly different things to the corporate mm-hmm. <affirmative>. And the net result might be that you don't actually get the outcome that, uh, that, that the overall economy needs. So through an index, there's a mechanism for collecting all those views, uh, and representing them at, at, at skill, at that 18 trillion at that huge economic skill. So yes, absolutely.
Speaker 3 00:04:05 So as demand has picked up for the use of indices, how have FUE Russell tried to adjust their product offering to try and accommodate, you know, this new demand but also a new demand for esg?
Speaker 1 00:04:17 So ESG used to be about scoring individual companies. Uh, Tesla are you, are you high esg or are you low esg? And the question then is, what question are you answering? Really? Is it a good green company? Is it a good social company?
Speaker 3 00:04:32 Well, let me just ask you there then. Do we need to have a better way of measuring ESG before we can start to score these companies on an esg? I mean, you mentioned Tesla, but like Facebook and Amazon, like, I'm, I'm not an expert. I was like, I wouldn't know. Are they good ESG or are they bad? Cuz it's not just about carbon footprint, it's about diversity and the way they treat their employees and things.
Speaker 1 00:04:53 The answer to that is transparency. Mm-hmm. <affirmative>. Right? Um, the answer to that is standardization of data and methodologies. So people start speaking a a common language. They, they have a, a common, I think of it as a, as a base of truth, right? Because currently people are saying similar things, but they might mean entirely different things because they're working with different data sets, different definitions, different methodologies. So, so yes, there, there they'll need to be much more standardization. Uh, and our approach is very much, uh, what I call open architecture mm-hmm. <affirmative>, which is to make the methodologies transparent, make the data transparent, but also allow people to bring in new components, new, uh, intellectual property. And that is important in ESG and sustainable investing because for this to matter, it has to matter at skill. Mm-hmm. <affirmative> and for it to matter at skill, uh, people need to be able to, uh, work across the landscape and not just with one provider like Pusy Russell, for example. Mm-hmm. <affirmative>,
Speaker 3 00:05:51 I mean, it sounds like the retail investor are trying to do their bit and the finance world, particularly fussy Russell, are doing their bit by allowing people a, a product which can allow them to be more specific about the companies they invest in. But how about at a, at the top level, the political level, and I, I know you've just, uh, uh, been involved with COP 26, so I wonder if you could give some thoughts about what really needs to happen there.
Speaker 1 00:06:12 Uh, we're, we're all somewhat skeptical in our own different ways. And, uh, sometimes I think, well, you know, it will last my time, but as soon as you have children, that perspective changes completely. Right.
Speaker 3 00:06:23 I can concur. I have have one more,
Speaker 1 00:06:24 So I, I worry. Yes, yes, you do. Uh, I worry, I worry about climate change and I worry that there is a lot of movement in the right direction. Uh, there's a lot of commitment and a lot of, uh, understanding growing. But if you look at the time skills that we're working on now, what the science says, so the, the, the consensus science, what I take as, as, as my guidelines, cuz uh, I don't have, uh, my own unique insights on top of that. Um, then time's running out. So Cop 26 is, is hugely important because it brings together so many different interests at a, at a government level, at a corporate level mm-hmm. <affirmative> at NGO level, uh, standard setting levels, all these interests coming together and that's needed. Um, but what's also needed is, uh, is urgency. And you see the urgency from the individual contributions and the, the speeches and the commitments, et cetera. But the overall picture is not yet lining up with a path to, um, low carbon economy mm-hmm. <affirmative> that, uh, lines up with what the science think needs to happen. So the 1.5 degree scenario that people often speak about from the, the Paris agreements, uh, that is not achievable yet with, with the current commitments and the current net zero targets and the, the what are called, um, the, the National Development Committees, those are not lined up yet.
Speaker 3 00:07:43 So I know that, um, Europe is probably a little bit ahead of the US in terms of having a price for carbon, but do you foresee that America will be, you know, quick to follow in terms of pricing carbon and, and finding a way of, uh, uh, you know, accelerating the corporate change? Mm-hmm. <affirmative>?
Speaker 1 00:07:59 So, so the pricing carbon question is, is a hugely interesting one because, uh, yes, there are mechanisms in place in different parts of the world to, to look at carbon prices, but there is not a global market for pricing carbon yet. And to really, um, to really start pricing carbon, we need to, we need a market for, for carbon like we have for global equities, um, like we have for other liquids, uh, instruments. Uh, and we're still quite a long way off that, and I think that would be an enormously important development, but we're not there yet.
Speaker 3 00:08:33 So as we look out over the next three or four years, particularly in the world of, uh, active and passive investing and perhaps the rising of, of interest rates being another trend that we're, we're possibly going to see, how do you see the world of investing sort of play out on, on that playing field?
Speaker 1 00:08:50 The big trends that I see are, uh, ESG and sustainable investing, driving change in investment styles. Um, and that is both important to the passive investment world and, uh, the active investment world. I think short term that means lots of people trying to adapt processes and get new data, but also re-engineer, uh, how systems work. For example, if you want to give a, a good picture of the carbon footprint of a multi-asset global portfolio, that requires a lot of data, but also a lot of systems functionality. So, so that's a near term requirement that is driving a lot of changes. On top of that, you have the, the, uh, the other big global trends, technology and, uh, data, uh, what I call data democratization, really driving a lot of, um, consolidation of capabilities. So even 10 years ago, you could not do what you can today in terms of technology and trading and seamlessness and, uh, the, the, the, the low cost of doing a lot of things.
Speaker 1 00:09:48 So that is changing, um, how investing works. The bar in some ways has become lower for, uh, for being able to provide access to markets. That's a big change. And then you have the, uh, the, the big demographic trends and, uh, interest rate trends and questions about inflation. Mm-hmm. <affirmative>. And certainly if rates start rising at a persistent base again, that will completely change investing as, as you know it, as I've known it. Yeah. There not a lot of people around that have seen other environments than what we're used to for sure. In terms of low rates.
Speaker 3 00:10:21 And now I'm right in thinking that, um, Fu Russell, you also published research yourself to try and highlight these issues. Can you perhaps talk about that?
Speaker 1 00:10:28 Yeah, we, we, uh, we're very active, uh, especially in in climate again, cause uh, ESG sustainable is a very broad topic and, uh, lots of very important dimensions to that. But, uh, we touched upon climate and the urgency of that. I see that as one of the mm-hmm. <affirmative>, the, the main, uh, focus areas there. Uh, and we published a lot of research on that. We've recently published, uh, what we call the net zero world atlas. Uh, and it basically gives at a country level, uh, what the implied temperature rises that is implied by the policies and the commitments that individual countries have in placed. Mm-hmm. So the net zero targets the nationally determined contributions, um, the current law that they have in place, how that impacts what we think, uh, the impact of a country on climate will be. Uh, and that's the type of awareness and the type of transparency that I think investors need, financial markets need. But more broadly, we need as well because there, there's so much confusion around this topic that mm-hmm. <affirmative>, we, we need clarity and we need insights. Right.
Speaker 3 00:11:28 So it sounds like the more conferences there are the most research reports that get, uh, pushed out there that just raise awareness, hopefully that's gonna start to trigger and con continue the momentum.
Speaker 1 00:11:38 Yes. I, I, I think, uh, yes, very much so. There's one thing that I, I worry about that might be a, a, a break on the speed at which we move mm-hmm. <affirmative>, and that is the risk of greenwashing. Right. Uh, so the risk of, so
Speaker 3 00:11:50 What do you mean by greenwashing
Speaker 1 00:11:52 As sustainable investing? ESG climate has become so important there, there are lots of commercial opportunities that come with that. I see.
Speaker 3 00:11:59 So
Speaker 1 00:11:59 Being the first to market with a new climate solution, a new climate fund, a new mm-hmm. <affirmative> climate Index, a new climate analytics platform, whatever it might be. Right. There's, there's commercial value in there. And what we need to, uh, guard against is that we have things that are being sold under a green label or a sustainable label or an ESG label mm-hmm. <affirmative> that don't quite line up with the impact that people think it might have. Right. And, and that is a, a risk that I see, and if I can just take a little bit more on that, a little bit more time on that, we know that historically ESG investing has been very profitable in equity markets. So ESG investments have done well and that makes it easy for people to invest in ESG because their financial incentives line up with their, their principles and their their objectives.
Speaker 1 00:12:47 But at some point, and maybe when rates start rising, maybe ESG investments, uh, do not have that outperformance effect anymore. Yeah. Yeah. And then there, there will be a trade off between, well, what is my principle? What is my financial incentive? What is my climate target and belief? And what is my financial incentive? So, so we, we need to be very clear that those are two different things and uh, it's great if they, they match, uh, but we should also be ready that yeah, we need to stick by our principles even when it's nec necessarily a financial consideration. Right.
Speaker 3 00:13:20 It's interesting because, um, I think there are still some very large funds out there that don't have an ESG mandate, and the more that that happens, uh, the more you may get this virtuous, you know, this virtuous circle of companies feeling that they need to be much more ESG aware and that will lead to their better performance. So hopefully we can get in that groove and, and it will be, uh, self-fulfilling, so to speak.
Speaker 1 00:13:42 Yeah. And this is a bit bit technical, uh, but forgive me. So we get a lot of people asking us, we, we run some of the largest benchmark families in the world, so markets that capture the overall investment opportunity in the uk, in the us, in China, different countries, different sectors, et cetera. And the benchmark families tend to be market caps. So they just represent the overall investment opportunity out there in a liquid and transparent way. Increasingly, we're getting the question, why are not all your benchmarking index is ESG in this is
Speaker 3 00:14:13 Interesting,
Speaker 1 00:14:13 But then there wouldn't be markets caped in this is anymore, because currently the companies that are the greenest are not the biggest to put in a very simple terms. So we'll come full circle when the market caped indices are the e ESG indices. Mm-hmm. <affirmative>.
Speaker 3 00:14:29 That's interesting. Well, listen, Anna, thank you so much for chatting with me this afternoon. It's been really interesting.
Speaker 1 00:14:33 No, thank you. It's been a pleasure.
Speaker 3 00:14:35 Thank you so much. Thank
Speaker 1 00:14:36 You.
Speaker 3 00:14:37 Sustainable investing and the role of ESG and corporate culture was something that was certainly talked about for 10 years, but it didn't really translate into investment opportunities. But now due to the rise of indices, allowing more direct investment into E S G and sustainable themes, capital allocations are accelerating these trends, creating opportunities that are only going to get bigger and more diverse in the future. If you'd like to read more on this topic, please go to fussy russell.com/research. We'll find much more information.
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